>> Wednesday, March 25, 2015

A wealth of research in recent decades has seen the economic approach to human behavior extended over many areas previously considered to belong to sociology, political science, law, and other fields. Research has also shown that economics can provide insight into many aspects of sports, including soccer. Beautiful Game Theory is the first book that uses soccer to test economic theories and document novel human behavior.

In this brilliant and entertaining book, Ignacio Palacios-Huerta illuminates economics through the world's most popular sport. He offers unique and often startling insights into game theory and microeconomics, covering topics such as mixed strategies, discrimination, incentives, and human preferences. He also looks at finance, experimental economics, behavioral economics, and neuroeconomics. Soccer provides rich data sets and environments that shed light on universal economic principles in interesting and useful ways.

Essential reading for students, researchers, and sports enthusiasts, Beautiful Game Theory is the first book to show what soccer can do for economics.

This book was a birthday present from my colleagues, who really know me very well! It's something a bit different from the usual. There has been plenty of work using the tools of economics to illuminate what's going on in the world of football (in fact, one of the best-attended sessions I went to in last year's Royal Economic Society Conference was devoted to using economics to figure out what the impact of Financial Fair Play would be). This is, as the subtitle suggests, the opposite. Palacios Huerta's work uses data from football to test economic theories, many of which are otherwise really tricky to fully test in the real world.

Penalties are particularly useful to him. Their formal, ritualised nature, with well-defined and understood pay-offs, allow him to test quite a few different theories. My favourite was how he used them to test whether psychological pressure affects performance in competitive environments (the key element here is who kicks first in a penalty shoot-out, which is randomly determined by tossing a coin). The author suggests a couple of ways to minimise the advantage he finds goes to the team that gets to kick first, and I really think FIFA should be looking at those.

Another example I particularly liked: How to test the efficient market hypothesis (basically, that the market incorporates any new public information fully and so immediately that no one can take advantage of it to make money, say, trading stocks)? Palacios Huerta's answer is to use the existence of half time, a period when no new information is emerging, and examine how betting markets react. He looks particularly at a situation when there has been a goal right before the interval, therefore providing a significant shock of information.

The book is basically a collection of papers, many adapted from papers already published. I was expecting a pop science-type book, a sort of Football Freakonomics, if you will, but it was quite a bit more technical than that. If Palacios Huerta simplified the papers, he did so only mildly. You get a good level of detail about his exact models, with equations and econometric results aplenty. This makes it ideal for a football fan with a good knowledge of economics. From what I could tell, though, anyone not comfortable with getting into the detailed economics could just skip the most technical bits and still get a very good understanding of the intuitions and results.